Interest rates have been rising, albeit at a snail’s pace. Some investors saving for retirement want to know what rising rates might mean for annuities, and whether it might be time to consider an annuity.

Matthew Sadowsky, director of annuities and retirement at TD Ameritrade, says you should first answer the fundamental question of why you’re thinking of purchasing an annuity. For many investors, it’s aimed at protecting principal in your portfolio, guaranteeing another income stream for the rest of your life or that of your heirs, or used for a tax deferral. (“What is an annuity, you ask?” Please refer to this annuity definition and primer).

“You might not want to buy an annuity as an investment but as a hedge,” Sadowsky says. “When you’re looking to buy an annuity, you should be less focused on trying to time the market and more focused on why you want that guarantee, which might provide a level of certainty, predictability and stability into your retirement.”

Here are some of the top questions investors have about annuities, annuity rates and interest rates.

Won’t the Value of My Annuity Be Higher if I Wait for Rates to Rise Before Buying?

That depends on the type of annuity you purchase. Fixed annuities are set by guaranteed interest rates, typically for a pre-determined length of time. So, yes, higher interest rates when you purchase the fixed annuity could mean a higher guaranteed growth rate or for income annuities, a higher stream of income later. Variable annuities are typically tax-deferred retirement tools that offer a variety of investment choices that rise and fall based on the value of the funds that are inside them. Like mutual funds, the sub-accounts of variable annuities are typically tied to equity, bond and/or money market funds (though some offer alternative choices, like REITs or commodities, for example), ebbing and flowing with the market performance of those assets.

How Long Should I Wait for Interest Rates to Climb?

If we all had the interest-rate crystal ball, that would be an easy answer. But no one ever knows when interest rates will rise again, or how quickly. Not even the Federal Reserve, which sets some interest rates, knows for sure.

In 2016, for example, the Fed said it would raise the fed funds rate three times, each by a quarter-point, but only did it once. It repeated that three quarter-point hike forecast for 2017, and through September it had hiked twice, with the possibility of a third by December. The point is, economic conditions change and, therefore, rate schedules can change.

Before 2017, the fed funds rate spent nine years below 1%, and the rate hasn’t been in the 4% range since 2007, so waiting for a return to that level might take years. Or it might not. If you have assets set aside for fixed-rate annuities, but you’re trying to find the optimum timing, you might consider investing a portion of it now and hold off on the rest until you get a clearer picture on interest rates.

What if Rates are Only Slated to Rise a Half-Percent a Year or So?

This is the classic cost-of-waiting dilemma. And the answer flows back to your response to the reason for owning an annuity. Typically, if you’re looking to put your money into annuities, you’re not trying to optimize the interest-rate environment, but are looking for a guarantee, for stability and predictable growth, a tax deferral, or better yet, an income stream that you will never outlive.

Waiting for higher rates before investing might result in a higher rate, but will that higher rate be offset by the interest you’re not earning today? Remember: the longer you wait to invest in an annuity, the longer you might have to wait before you begin receiving payouts. Plus there’s the risk that rates might not rise at all—they might even fall again.

Investors should carefully consider a variable annuity’s risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment objectives of the underlying investment options. This and other important information is provided in the product and underlying fund prospectuses. To obtain copies of the prospectuses, contact an annuity specialist at 800-347-7496 or email annuities@tdameritrade.com. Please read them carefully before investing.

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Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Optional riders are available at an additional cost. All guarantees are based on the claims paying ability of the insurer. An annuity is a tax-deferred investment. Holding an annuity in an IRA or other qualified account offers no additional tax benefit. Therefore, an annuity should be used to fund an IRA or qualified plan for annuity features other than tax deferral. Product features and availability vary by state. Restrictions and limitations may apply.

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